A global manufacturer of electrical switching equipment (ESE) is considering out

Question

A global manufacturer of electrical switching equipment (ESE) is considering outsourcing the manufacturing of an electrical breaker used in the manufacturing of switch boards. The company estimates that the annual fixed cost of manufacturing the part in-house, which includes equipment, maintenance, and management, amounts to $13 million. The variable cost of labor and materials are $12.00 per breaker. The company has an offer from a major subcontractor to produce the part for $21.00 per breaker. How many breakers would the electrical switching equipment company need per year to make the in-house option the least costly? The company should consume more than 1444444 breakers per year to make the manufacturing the part in-house option the least costly. (Enter your response rounded to the nearest whole number.) Assume the subcontractor wants the company to share in the costs of the equipment. The ESE company estimates that the total cost would be $6 million, which also includes management oversight for the new supply contract. For this concession, the subcontractor will drop the per unit price to $14.00. Under this assumption, how many breakers would the ESE company need per year to make the in-house option least costly? The company should consume breakers per year to make the manufacturing the part in-house option the least costly. (Enter your response rounded to the nearest whole number)

Explanation / Answer

Estimated Cost to produce the breaker part in-house = $13 million

Offer to the Company to produce the part by Subcontractor = $ 21 per breaker

Variable Cost to be incurred to produce the par by the company = $ 12 per breaker

Marginal Contribution is the hands of Subcontractor = $ 21 - $12 = $ 9 per breaker

Breaker to produce in-house at least cost = $13,000,000 / $9 = 1,444,444.44 breakers

=> To produce the part at least cost, the company has to consume more than 1,444,444 breakers.

Now, The ESC Company estimated the cost to $ 6 million to produce the part.

The Subcontractor now reduced the Offer price to $14 per breaker.

Variable Cost to be incurred to produce the par by the company = $ 12 per breaker

Marginal Contribution is the hands of Subcontractor = $ 14 - $12 = $ 2 per breaker

At the reduced cost, Breaker to produce in-house at least cost = $6,000,000 / $2 = 3,000,000 breakers

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